U.K. 30-Year Gilts Drop Fourth Day on Sale as Notes Rally on BOE

June 25 (Bloomberg) -- U.K. 30-year bonds declined for a
fourth day as the Debt Management Office sold 5 billion pounds
($7.7 billion) of securities due in 2068 via banks, the longest-ever maturity for a conventional gilt.

Thirty-year securities underperformed their shorter-maturity peers after the extra yield over 10-year bonds shrank
to the least in 15 months. Two-year gilts rose for the first
time in seven days as Bank of England policy makers said the
growth outlook remained modest and further asset purchases were
possible. Governor Mervyn King, who retires at the end of the
week, told lawmakers that the U.K. economic recovery is too weak
to be satisfactory. The pound fell versus the dollar.

“The longer end of the curve has been incredibly resilient
and we’ve seen a big flattening between the 10- and 30-year but
that seems to have come to an end today,” said Nicholas
Stamenkovic, a fixed-income strategist at RIA Capital Markets
Ltd. in Edinburgh. “The market seems to be finally positioning
for not just the gilt syndication today, but more longer-dated
supply during the third quarter.”

The 30-year gilt yield rose three basis points, or 0.03
percentage point, to 3.62 percent at 4:44 p.m. London time after
climbing to 3.66 percent yesterday, the highest since September
2011. The 3.25 percent security maturing in January 2044 fell
0.59, or 5.90 pounds per 1,000-pound face amount, to 93.195.

The yield difference, or spread, between 30-year gilts and
10-year securities widened three basis points to 108 basis
points after narrowing to 103, the least since March 21, 2012.

The benchmark 10-year yield was little changed at 2.54
percent, while the two-year rate fell three basis points to 0.52
percent.

Debt Sale

The 2068 securities, known as super-long bonds, were priced
to yield 3.651 percent, or 3.5 basis points more than that of
gilts due in 2060, according to the debt office.

“Long-dated gilt yields have backed up significantly to
levels unseen in nearly two years and the syndication today
offered a yield that looks very attractive to investors as a
result,” said Jamie Searle, a fixed-income strategist at
Citigroup Inc. in London. “The market has been volatile and our
view is that the selloff in the U.K. market is overdone given
the outlook of the economy.”

Bank of England Deputy Governor Charles Bean said in a
letter to the Treasury Select Committee that additional asset
purchases and targeted policies would be more reliable tools for
boosting growth than lower interest rates.

Selloff ‘Excessive’

“The selloff in the past few days was excessive and was
not consistent with the U.K. economic outlook,” said John
Wraith, a fixed-income strategist at Bank of America Merrill
Lynch in London. “Bank of England policy makers confirmed that
point in their testimony to Parliament today.”

King said the global economic recovery is at risk of
further setbacks and central banks are a long way off tightening
monetary policy.

“Clearly the level of interest rates and the scale of
asset purchases will have to be unwound and we must return to
more normal conditions at some point,” King said in testimony
to lawmakers at the Treasury committee in London. “That point
is not today.”

Five-year gilts offer value as the Bank of England’s policy
is likely to remain accommodative, according to David Hooker, a
money manager at Insight Investment Management Ltd. in London,
which oversees the equivalent of $394 billion.

“If you look at the U.K., we are not at the stage yet of
wanting to reduce stimulus to the economy,” Hooker said at the
Euromoney Global Borrowers and Investors Forum in London. “The
U.K. is in a very different position to the U.S. and it will lag
in the interest-rate cycle. Five-year gilts are a good example.
I’d buy it outright against cash.”

Bond Returns

U.K. gilts handed investors a loss of 4 percent this year
through yesterday, according to Bloomberg World Bond Indexes.
German bonds dropped 2.2 percent and Treasuries declined 2.9
percent, the indexes show.

Short-sterling futures for March 2014 rose for the first
time in four days, a sign traders were reducing bets on higher
borrowing costs. The implied yield on the contract fell seven
basis points to 0.76 percent.

The pound fell 0.1 percent to $1.5412 after declining to
$1.5344 yesterday, the lowest level since June 5. The U.K.
currency was little changed at 84.89 pence per euro.

Sterling has strengthened 4.7 percent in the past three
months, according to Bloomberg Correlation-Weighted Indexes,
which track 10 developed-market currencies. The euro gained 4.9
percent and the dollar climbed 2.9 percent.